The EU’s agreement to launch a recovery fund to ease the effects of the pandemic has paved the way for investors to end a longstanding preference for US assets, according to analysts, boosting the euro at a time when the dollar is hobbled by political and economic risks.
Ahead of the deal on Tuesday, the consensus among analysts was for the euro to reach $1.15 by the end of this year, according to Bloomberg. Instead, the currency rushed above that point as soon as the €750bn fund was announced. On Wednesday the euro traded at its highest against the dollar since September 2018 at $1.16, up by nearly 7 per cent since the project was first proposed in late May.
Gaétan Péroux, a strategist at UBS Chief Investment Office said that Brussels’ plans to issue much more shared debt amounts to a “milestone” for the single currency.
“The euro area has matured,” agreed Seema Shah, chief strategist at Principal Global Investors in London. “[There is] finally an acknowledgment that the original structures . . . prevented the region from realising the full benefits of the single currency.”
Rising confidence in the euro’s long-term prospects comes as investors have turned sour on the dollar, citing big cuts in interest rates and a flood of liquidity unleashed by the Federal Reserve as it tried to alleviate the economic effects of the pandemic.
Those rate cuts — to near zero — mean that the US no longer has a big yield advantage over the EU, where base rates have been negative since June 2014. As a result, longer-term investors could abandon their long-held preference for US assets, said analysts at Goldman Sachs, who have pencilled in nearly 10 per cent of gains for the euro versus the dollar over the next 12 months.
“We are not confident that the US asset market dominance over the past 10 years will continue,” the bank’s analysts said in a research note.
In addition, US coronavirus infection rates have been climbing since its economy reopened, raising fears of another round of closures at a time when Congress continues to wrangle over another Covid-19 stimulus bill. By contrast, European countries are cautiously reopening.
A better trajectory of growth in Europe will be key to driving the euro higher, said George Saravelos, global head of currency research at Deutsche Bank. He expects the euro to trade at $1.20 by the end of the year, as investors ditch US assets to buy European equities and bonds.
Wim Vandenhoeck, a senior portfolio manager at Invesco in New York, said that while the US economy struggles to recover, investors will edge away from the dollar in favour of the euro and emerging markets assets as the wall of money created by quantitative easing starts to seek out places with higher growth.
“Would I be surprised if the euro traded at $1.30 or $1.35 in a year or in 18 months’ time? Absolutely not,” he said.